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Mark's Market Blog

7-5-15: Greeks Vote OXI

By Mark Lawrence

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The markets response to Greece has been subdued - no one seems to really believe that a default will be allowed. Super Mario Draghi, one way or another, will print up a few billion Euros and make the entire incident go away, right? Will he? Maybe, but printing up unlimited money to sweep problems under the rug has a long and storied multinational history, and it always ends badly. Anyway, Greeks voted "no," so the ECB claims no more money for them and the EU says no more euro. Is it over? Nah - this is Europe, the drama doesn't end until the fat lady sings, and I haven't even seen her on the stage yet.

S&P 500 January 6 2014 to July 3 2015

Unnoticed in all the economic drama and turmoil, Obama's June 30 deadline for a deal with Iran passed. You'll be shocked, shocked to hear talks continue. The real deadline is July 9th; after that day his deal with congress for a 30 day evaluation expires and it goes back to the standard open-ended 60 day examination and debate. Israel's prime minister Netanyahu says each day that passes brings greater Western concessions toward Iran in talks over its nuclear program — and that the emerging deal could be worse than one that led to North Korea gaining an arsenal of nuclear weapons. Personally, I've agreed for six years with McCain, who was caught during his presidential campaign singing "Bomb, bomb, bomb. . . bomb bomb Iran." (for those of you under 50 or so, that's sung to the music of "Ba, Ba, Ba... Ba Barbara Ann," a beach boys hit not particularly noteworthy for its deep meaning or gripping lyrics.)

Greece voted today. Polls closed at 7 pm Athens time, noon eastern time, 9 am pacific time. "NO" won 61% to 39%. Rhetoric was flying fast and furious before the vote as the unelected bank puppets in Brussels issued their best threats against the Greeks if they had the temerity to actually exercise their franchise.

If I were Greek I would vote no just to spit in the eye of these power hungry bankocrats. It's bad enough when all we have to choose from is which bank-owned politician we are going to vote for; when we don't even get the fig leaf of a vote, I think it's time for a revolution. By the way, it was the similarly unelected Pope Clement XIII in the 1750s who put fig leaves on all the statues - no Greek sculptor would ever have dreamed of such nonsense.

What's in Greece's immediate future? Pain. Their major export is refined petroleum, priced in dollars, and their major import is raw petroleum, also priced in dollars, so a new devalued currency has no affect on that. Next is tourism, but it's almost inevitable there will be demonstrations constantly for some time, some of these with a certain amount of violence, so that's going to curb vacationers. They'll be wanting to import medicines, foods, oil, but as their currency depreciates those will only become more and more expensive. As their economy chokes off, unemployment is likely to rise. Their government will likely try to institute price controls to save those on a fixed pension, but we all know that price controls simply mean long lines leading to empty shelves. All things considered, I don't think Greece will be a great place to live for the rest of this decade, perhaps longer. Why don't the Greeks negotiate with the Germans? Greece has 25% unemployment, 50% unemployment for those under 30, and their economy is 25% lower than the peak in 2007. Two-thirds of those under 35 live with their parents. Greece is in an intolerable situation - worse than the great depression in the US - and no further concessions can be made. They simply must find a way to revive their economy. Meanwhile, German finance minister Schaeuble says, "Greece will stay in the Euro no matter what." Not real big on democracy these europeans. Today Greeks voted on whether to accept a deal with Europe. OXI signs are all over Greece and OXI is dominating at the ballot box. OXI is Greek for "No," as in "Oxymoron" meaning "No, stupid." Where I went to school, students at the nearby Occidental College were called Oxymorons.

Oxymorons at work and play

What's next for Europe? Continued immigration problems, as millions of arabs and africans wash up on their shores looking for a better life; continued issues with Putin who sees europe's indecisiveness as a weakness to be exploited; continued problems with the UK who says their economy is "shackled to a corpse;" and a new problem, which is that the next time europe confronts a member economy in trouble like Spain or Portugal or Italy no one will believe their resolve. What happens when Greek banks fail left and right, which they're pretty much guaranteed to do this month? When Greece leases US naval ports to the Russian navy? When Greece takes hundreds of thousands of Syrian and Iraqi refugees and loads them on trains to Germany and Sweden? When politicians in the balkans and eastern europe see the EUs weakness as an opportunity to gather up territory and power? Europe is in serious trouble, all because over the course of five years they couldn't find a solution for a small country that likes to retire early and sip wine by the Mediterranean.

Puerto Rico is $72 billion in debt and its governor, Alejandro Garcia Padilla, said last Sunday night that they could not pay. There are no legal provisions for a commonwealth territory to declare bankruptcy, so this mess will drag out for a couple of years. Add this to the Greek default and we're looking at good reason for a period of market turmoil.

The Chinese stock market continued to go down through Friday losing 10% on the week, 30% on the month, even though the central bank lowered interest rates. This was intolerable to the government, so they changed the rules at the end of Monday: the country's pension fund will now be allowed to invest in the stock market. IPOs have been frozen. Interest rates have been cut. Brokerages have been ordered to buy and hold shares - $20 billion worth - to stabilize the markets. They also set their Securities Regulatory Commission looking for market manipulators. That one is easy, the market is being manipulated by the central bank and the government. Investors all over China are saying they're just waiting for a rebound so that they can get out even. I know what that means - any rebound will be stopped in its tracks by uncontrolled selling. The average joe is going to be stripped of his savings and pension when this is over. People in china are used to the government owning everything, so it's popularly thought the government owns the stock market and it's their responsibility to keep it growing. The market is up 150% in the last 18 months, so as I see it a 30% drop only gets us about half way there - a 60% correction gets us back to normal levels. I will be unsurprised to see this market continue to go down, strongly and severely. China is going to learn what happens when an irresistible market meets an immovable government - the market always wins in the end.

What's next for the US? I expect a stunning drop in the stock market this week as institutions and hedge funds revert to cash, waiting to see who gets burned. Greece, Puerto Rico, China, it's all just too much. Again, I expect this will be a correction, perhaps 10% to 15%, then I expect China will again find a way to sweep their problems under the rug and the US economy will continue to grow, but first we're going to have a rough ride for a few weeks.

Many of my readers are unhappy about the patriot act. Well, China was apparently envious; they now have sometime far more powerful. The legislation defines national security in far-reaching terms, ranging from finance, politics, the military and cyber security to ideology and religion. The draft defines "national security" as ensuring that the political regime, sovereignty, national unification, territorial integrity, people's welfare and the "sustainable and healthy development" of the economy and society, and other unspecified "major national interests" are "relatively free from danger and not under internal and external threats". The draft law also deals with the protection of the socialist market economy, industries vital to the economy as well as other economic interests. It underscores the importance of grain security and cyber security, as well as preventing and effectively resolving incidents that affect social stability, such as food safety scandals. In addition, the law stresses the need to prevent cyber attacks and dissemination of illegal and "harmful" content online. When the Chinese market crashes and their economy tanks, these laws will already be in place to justify building a new communist police state; more importantly before the crash this law allows mechanisms, personnel and supplies to be put in place. When the Chinese government needs to move, they're going to be ready to move very quickly. I think I can promise you there will be no pictures of a lone unarmed guy stopping a column of tanks this time.

ISIL has beheaded several women; in at least two cases it was a husband and wife pair who were beheaded for the crime of "sorcery." They've also started their invasion in Egypt. ISIL means to create a single caliphate that extends from China to Casablanca, placing all the muslim nations under one government.

Japanese are tired of making more Japanese.

UK prime minister David Cameron says he intends to outlaw strong encryption in the UK, meaning the government will be able to listen to everyone's phone calls and read everyone's emails. Perhaps they'll be able to force you to give up your laptop password, meaning they'll even be able to read all your files. Of course this is all about criminals and terrorists and pedophiles. Some of my friends will no doubt say, "I have nothing to hide, what do I care?" I have far less faith in the government - at best they'll store everything in their computers and it will wind up in China. At worst I'll get an email, "Please come in and explain this." Several years ago Britain put in cameras all over the highway system, for catching terrorists and criminals and locating abducted children. It's always for the children, no one loves your children as much as the government, not even you. Now it's primarily used to time you from one camera to the next and mail you a speeding ticket, and to track down deadbeat dads. Turns out there aren't so many terrorists and bank robbers hanging out on the freeways with license plates "Blow U Up" or "I Rob Bks." One has to wonder, how did they catch criminals and terrorists and pedophiles before they could read your iPhone? And how come there are suddenly so many walking around that they can't possibly catch unless they can read your iPhone? And if law enforcement can read everything you own, what about crooked cops? Chinese and Russian hackers? Criminals? And if strong encryption is banned that's the end of ecommerce - how do you send your credit card details to Amazon without strong encryption? Perhaps you're thinking that you don't care if Apple and Google and Facebook put in a backdoor for the Brits. What happens when chinese and russian hackers get into UK servers and get the backdoor keys? Perhaps Cameron will pass such a law. If he does, I expect many phones and internet services will simply cease being available in the UK.

At the peak in 1996, there were 8,025 publicly listed US companies; as of 2012 that number was down to 4,102. According to historical trends the economic development in the US, in 2012, 9,538 should have been listed meaning there was a "gap" of 5,436 listings. According to Census data there are almost a million more public and private firms in the US than in 1996. Three economists examined this and concluded it wasn't industry reallocation, as all industries except industrial mining experienced drop-offs, with some industries losing about 80% of listed firms. Changes in standards to be listed on the markets, an increase in larger companies dominating the listings, and unfavorable market conditions were also rejected as causes. In the end, the economists decided that mergers and acquisitions of public firms contributed most to the listing gap. "We show that the delist rate rose because of an increase in merger activity involving publicly listed targets," the study said. The number of firms delisting voluntarily was dwarfed by the forced delistings because of takeovers. Wall Street is financing and directing the conversion of our liberal economic system into a closely held oligarchy. My personal fave: UPS is now about 70% owned by some Wall Street banks and hedge funds; FedEx is about 80% owned by the same people. And if you ship a package air mail and it crosses the Rockies it flies on a FedEx plane. We have a Wall Street arranged shipping monopoly in our country now. And on January 1, UPS and FedEx came out with completely new rate tables that doubled my shipping costs. "The moral crisis of our age has nothing to do with gay marriage or abortion," Nobel economist Robert Reich recently wrote. "It's insider trading, obscene CEO pay, wage theft from ordinary workers, Wall Street's continued gambling addiction, corporate payoffs to friendly politicians, and the billionaire takeover of our democracy."

Bonus free picture of the week, with special reference to Texas' new law establishing a Texas gold reserve:

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